It seems logical that wealthy individuals reached their lofty financial status by making numerous smart decisions. We assume people with seemingly no money worries don’t make blunders like the average earner does. Yet it’s common to hear about rich people who lost it all or took a big hit because of major mistakes they made.

Maybe they knew all the in’s and out’s of managing their wealth but took undue risks. Perhaps, lacking knowledge about various aspects of investing or taxes, they acted on poor advice or didn’t seek competent outside expertise. Or they just figured that having tons of money meant they didn’t have to worry about it, and they contentedly and cluelessly sat on their big pile of money until it started crumbling.

An analogistic quote about losing wealth is a phrase about lost love written by poet Alfred Lord Tennyson: “Tis better to have loved and lost than never to have loved at all.” That’s wrong. For some people who have had money and then had it taken away, it was catastrophic for their lives and egos. Some of those people never get their wealth back, and it kills them with regret and remorse for the rest of their lives. They’re miserable.

Costly financial mistakes can be avoided with the right planning and discipline. Let’s take a look at some of the reasons these mistakes happen.

Hubris – From Staying Ahead of the Joneses to Sheer Stubbornness

One of the biggest problems you see with a wealthy person is hubris. Let’s assume we’re talking about a high-status person such as a doctor, attorney, or other highly accomplished professional who earns well into six figures. In their social circle, they have more education than most of their friends. They drive the nicest cars, own the nicest houses, and have clout where they work. They’re compelled to showcase their status and wealth. They take on too much debt to buy those fancy cars, buy a house that’s bigger than they need, or buy a jet to fly privately with their family. They feel that they have to look like this successful, high-status person, and lean all-in to that lifestyle that’s going to end up costing them much of their wealth.

I had a call with a lady who said she had been offered $18 million for medical offices she owned. She was the most arrogant person I’ve ever had a call with. We started narrowing down what her lifestyle looked like. I determined she spent over $2 million a year on her lifestyle. She had no other savings and assets outside of the $18 million someone was going to pay her for the medical practice.

I said, “You can’t retire. You’re not even close.” I advised her that she needed to cut her lifestyle expenses in half. Well, she got mad at me for telling her the truth.

Hubris comes in many forms, especially in terms of stubbornness when wealthy people think they know better than financial professionals. For example, there are a bunch of high earners today who want to invest in things outside of the stock market. Their friends are starting businesses or buying businesses or doing real estate deals. They think, because they’re smart, rich, and have a formal education from a big-time school, that they can figure all of it out on their own.

But I’ve seen these accomplished, educated, wealthy people who get into private investments with friends, family, or work colleagues lose a ton. I knew a data scientist who had been referred to an investment opportunity by people in their professional circle. He lost about $1 million in what turned out to be two separate Ponzi schemes. People had come into his workplace and explained these investment ideas, telling the employees they didn’t need to hire a financial advisor because they were smart and could do their own due diligence. But they got scammed.

Poor Tax Planning

There’s a common misconception that CPAs are planning-focused when, in reality, most are compliance-focused.

Most people assume their current tax-focused compliance person is doing everything they can to reduce their tax bill. That is not true. Folks would get a better outcome from a tax planning perspective if they would request that for a separate fee, and on a dedicated basis, their CPA would review their situation to see if there’s anything that could be done to substantially reduce their taxes for future years from a planning perspective. This could include having the CPA review how their entities are structured, review their expenses and deductions they may be eligible to take, or explore more exotic strategies that may be a good fit for their particular situation. If people would take that approach and pay the CPA an extra $2,000 to do that detailed planning, I’ll bet you they could reduce their taxable income significantly.

High earners who are building long-term wealth typically have more complicated tax returns. It helps greatly to have a professional who can find strategies that can reduce taxes. Keep in mind that mainstream tax strategies aren’t always optimized for high-income earners.

There are so many tax scenarios that can come into play as one acquires more wealth, and if not planned for wisely, they can result in huge tax hits. Among those tax situations: failing to plan for a sudden spike in income; missing one-time planning opportunities such as when selling a business, executing stock options, or realizing significant capital gains; overconcentration in a single tax-advantaged investment like Roth IRAs, life insurance, or municipal bonds; failing to consider private partnerships, which can provide capital appreciation and tax benefits like deductions, credits, or passive losses.

Knowing When It’s Prudent for Concentration, Then Diversification

Nobody gets rich from diversification. People get rich from concentration.

Understanding everything there is to know about a single idea and concentrating your attention and focus on it is a huge factor in getting wealthy. If you’re right, it can take you from a zero to a hero almost overnight. Concentration will get you rich; diversification will keep you rich.

Markets change and cycle. I don’t know anybody who got rich purely in the stock market. I know people who worked for successful companies and were granted stock options, and those options grew to millions in value. But they understood their company and its wealth in a concentrated way. Competitors in your field, however, will come along and chisel away at parts of your company’s value over time, so to keep your wealth, that’s when you should start to diversify.

One area where it pays to stay concentrated is real estate. Some people have their whole portfolio in owning real estate. It will always be appealing because real estate does three things: It appreciates in value over time, there are tax efficiencies associated with owning real estate, and it also generates cash flow.

The more you have, the more there is to lose. It takes years, decades, to build dream-come-true wealth, but not staying on top of it can quickly lead to financial nightmares. We all make mistakes, even the wealthiest and seemingly smartest among us, and to protect and grow their wealth, it’s important to be open to education and collaboration, just as they were when building it.

This article is subject to the disclaimers found here.